The Avengers will be a billion-dollar movie
Filed under: Investing
The story so far
All signs point to The Avengers joining the elite ranks of billion-dollar box-office hits. According to Box Office Mojo, Time Warner's (NYS: TWX) The Dark Knight took in $238.6 million in its first week in U.S. theaters. The Avengers is at $244 million as of this writing, and its first week isn't yet over.
For Paramount, eager audiences could result in a huge and highly profitable haul. Reuters reports the studio is due 8% of the gate, DVD sales, and Internet showings as a consequence of its 2005 deal to distribute Marvel movies. Paramount has already received $57.5 million of $115 million promised as an advance on distribution earnings.
Does that mean Viacom is getting a better deal than Disney? Unlikely. Marvel amended its distribution arrangement in 2008 in exchange for committing more upfront capital to its studio productions. In exchange, Paramount cut its fee from 10% to 8%, guaranteeing the comic book king a larger slice of profits for any future hits. Disney gets the same benefit.
Paramount wins, too, of course. A follow-up to the 2005 deal signed two years ago reportedly guarantees 9% of the proceeds from Iron Man 3, but what happens after that is anyone's guess. Disney's Buena Vista Pictures generally handles distribution for its in-house movies. Marvel productions should shift to this format at some point in the future.
Until then, what can Disney shareholders expect in terms of a cash flow contribution from The Avengers? Will it be any more than a rounding error? Some of you appear to be wondering.
A not-so-heroic attempt at deciphering studio math
- Disney's studios tend to account for 16% to 22% of total revenue, and 9% to 15% of operating income.
- Disney's overall operating margin tends to run from 16% to 20%, with 19.5% as the average in its best studio years (2007, 2008).
- Companywide, cash from operations has recently come in at around 90% of operating income.
- Therefore -- and really, this is only a very rough guide -- we might say that Disney's studio cash contribution is likely to be 90% of its maximum operating profit contribution, which is 15% of 19.5% of overall revenue. (Still with me?)
- Analysts believe Disney will take in $42.71 billion in fiscal 2012 revenue.
- 19.5% of that is $8.33 billion, which is our rough estimate of current-year operating profit.
- 15% of that is $1.25 billion, which is our rough estimate of studio operating profit.
- And 90% of that is $1.12 billion in operating cash contribution from the studio operations.
Assembling profits, slowly
Using the same ranges as a proxy for cash contribution, it seems possible a $1.12 billion box office performance by The Avengers would account for somewhere between $250 million and $340 million in cash from operations during the current fiscal year and much more than that in succeeding years thanks to Blu-ray, DVD, and digital sales via the likes of Apple's (NAS: AAPL) iTunes, which already sells digital DVD equivalents packed with bonus features. Overall iTunes sales are on track to eclipse $8 billion during the current fiscal year.
Meanwhile, Paramount's 8% cut of The Avengers gate could reach $90 million this year, and a bit more than that down the road when you include DVD and Internet sales. Good, yes, but still well short of Disney's minimum haul.
Finally, what would a $250 million contribution from The Avengers mean? The House of Mouse has already collected $7.5 billion in operating cash flow over the trailing 12 months. Presuming that number doesn't change too much over the full fiscal year, Marvel's epic team-up could be responsible for -- wait for it -- 3% of Disney's fiscal 2012 organic cash generation.
Call it a rounding error, a blip, or even a non-event if you like. That's not really the story, nor is Paramount's cut. The truth is that, for Disney, The Avengers is the beginning of a long-tail opportunity that could add billions in revenue from park rides and merchandising while teeing up further profits for the studio operations. But it would have been an even bigger win for Marvel had the company remained independent.
Give Iger credit for recognizing the opportunity and moving to capture the profits. Identifying long-term winners isn't easy, especially those with the sort of disruptive DNA that Marvel possessed. Yet there are rebels still out there, and some -- like this potential multibagger -- are still trading on the cheap.
This article originally appeared on Dailyfinance.com.
- Apple: As good as it gets
- Angry Birds developer plans an IPO for 2013
- Where have all the gamers gone?